General Question

luigirovatti's avatar

Would the following description given in "Without a Hitch" by Andrew Price be realistic?

Asked by luigirovatti (2363points) 1 month ago

The description is the following:

Every year, credit card companies issue millions of credit cards. The more cards they make, the more money they make. Of course, the more cards they issue, the greater the chance they’ll extend credit to the wtong people.

Credit card companies make their money by charging high rates of interest and high fees to high risk cardholders. The trade off is they know lots of those people won’t pay. Sure, they make a cursory effort to collect the debts, but they give up quickly and write them off their taxes. To cover their losses, they buy insurance. Since they have insurance, they won’t miss yhe money. The carrier will welcome the theft.

Insurance companies make money by selling policies, but they can only sell them if people fear a potential loss. If no one ever stole from credit card companies, there wouldn’t be a market for insurance. No market for insurance means no premiums. So rather than being upsey, insurance companies welcome a bit of theft because it allows them to get rich. They won’t miss the money, because they’ll just raise their premiums to get the money back. It’s back to the credit card companies, but they don’t care about premiums. They pass those on to customers in their fees.

In a way, the cardholders get hurt, but these premiums get spread over billions of cardholders, each of whom knows what fees they need to pay to get and keep the card. If they think the fees are too high, or they aren’t getting a good deal, they can cancel the card.

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2 Answers

Tropical_Willie's avatar

Bogus
“Sure, they make a cursory effort to collect the debts, but they give up quickly and write them off their taxes. To cover their losses, they buy insurance. Since they have insurance, they won’t miss yhe (sic) money. The carrier will welcome the theft.”

They can’t write off the loss and get insurance payments, that would be fraud !

Zaku's avatar

It’s also not “theft” when someone fails to pay their credit cards.

Credit card companies, like banks, make obscene amounts of money (most of their income) by charging compound interest (and fees) on debts. Especially when people keep large balances on their cards for many months or years. When some customers miss payments, that’s when the card companies start to charge major fees and raise interest rates to the highest the laws will allow. They also sell the debts with the worst prospects off to debt collectors.

Also, many credit card holders do not pay any fees to get or to keep credit cards. So no, they can’t and don’t “just raise fees” to cover losses to unpaid debts. The cards with fees to get or keep them are the worst deals, for people with the worst credit or the worst judgement.

They also make money in various other ways, especially charging fees to businesses to accept payments using their cards, and providing data about transactions. Not to mention the related “credit bureau” businesses.

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